Australian GDP Pickup Suggests RBA Transition Working: Economy

Employees pour molten steel into a ladle for mold making in the foundry at the Backwell IXL plant in Geelong, Australia. The Reserve Bank of Australia cut interest rates by 2.25 percentage points from late 2011 through August to spur domestic-driven growth and compensate for a mining investment slowdown. Photographer: Carla Gottgens/Bloomberg

June 4 (Bloomberg) -- Australia’s economy grew at the
fastest pace in two years as surging exports and home building
showed record-low borrowing costs are sustaining a 22-year
expansion even as mining investment slows.

Today’s data suggest the economy is in better shape to
withstand government budget cuts and a decline in resources
projects, which Reserve Bank of Australia Governor Glenn Stevens
has flagged as a headwind for growth. He shifted to a neutral
bias this year and has signaled a period of steady rates.

“Despite some perceptions to the contrary, the Australian
economy is doing well,” said Craig James, a senior economist at
a unit of Commonwealth Bank of Australia. “In fact it’s doing
very well. The economy is growing comfortably above its trend or
‘‘normal’’ pace; inflation is under control; interest rates are
at historic lows; productivity is solid; and home construction
and exports are leading the way forward.”

The local dollar traded at 92.73 U.S. cents at 12:21 p.m.
in Sydney, from 92.62 cents before the release. Benchmark 10-year bond yields climbed 7 basis points to 3.78 percent, heading
for the biggest jump since May 22.

Compared with a year earlier, the economy expanded 3.5
percent in the first quarter, today’s report showed. The median
forecast of economists was for a 3.2 percent rise.

Housing Consumption

“The stronger growth evident in today’s numbers is
welcome, but the composition of growth continues to highlight
challenges faced by the economy,” Treasurer Joe Hockey said in
a statement after the release. “The mining sector will continue
to be a major contributor to GDP growth, but this will
increasingly come from production and exports rather than
construction and investment.”

Hockey last month announced cuts to spending on welfare and
the public service and a new tax on the highest paid. Consumer
confidence fell to its lowest level since August 2011, prior to
the central bank’s most recent easing cycle, after the budget’s
May 13 release.

The nation’s household savings ratio rose to 9.7 percent in
the first quarter from a revised 9.6 percent in the final three
months of last year, today’s report showed.

Economic Transition

The Reserve Bank of Australia cut rates to a record-low 2.5
percent to foster a transition to consumption and encourage
industries like residential construction to offset declining
mining investment.

Companies plan to spend A$137.1 billion in 2014-2015, a
government report showed in Sydney last week. That was “well
above” expectations and suggested “the transition of the
Australian economy from mining investment to non-mining
investment is occurring very smoothly,” said Joseph Capurso, a
Sydney-based currency strategist at Commonwealth Bank of
Australia.

The labor market has also held up, with the jobless rate
remaining at a better-than-expected 5.8 percent in April.
Lending too is responding to low borrowing costs, with private-sector credit expanding 4.6 percent in April from a year
earlier, the fastest pace since March 2009, central bank data
showed.

“Growth looks to have been somewhat firmer around the turn
of the year,” Stevens said in yesterday’s statement announcing
the decision to leave rates unchanged. “There has been some
improvement in indicators for the labor market in recent months,
but it will probably be some time yet before unemployment
declines consistently.”